Trump shoots down millionaire’s tax trial balloon

He called a potential millionaire’s tax “very disruptive" on Wednesday, a day after former House Speaker Newt Gingrich circulated a message from Trump saying the president loves the idea of a small tax increase on the rich but was counseling Republicans against it for political reasons.

Trump’s comments in the Oval Office capped weeks of chatter in GOP circles about letting the 37% marginal income-tax rate climb back to 39.6% or rise to 40% on incomes over $1 million as part of the tax-and-spending bill Congress is considering. The idea, which cut against longstanding GOP views on taxes, could have countered Democrats’ argument that Republicans are simultaneously trying to take money from Medicaid and lower taxes for the richest Americans.

Republicans’ willingness to discuss any tax-rate increase reflected the shift toward populism in their voter base, one wrought by Trump as he attracted working-class supporters less wedded to the party’s traditional economic worldview. It is also a sign of the challenge facing lawmakers as they hunt everywhere for dollars to offset Trump’s tax-cut plans and proposed spending on border enforcement and defense.

“This is what appears when you put a lot of pressure on policy makers and the underlying orthodoxy is shifting," said former GOP Rep. Peter Roskam of Illinois.

While Trump has upended longstanding GOP positions on trade and foreign policy, he has taken more traditional stances on taxes, and the idea of raising any rates was always a longshot. Given resistance from GOP lawmakers, the only plausible path to raising top tax rates without Democratic help would be a full-throated Trump push. This week’s remarks came far short of that, and in large measure, the center of gravity in the party that identifies itself by opposition to tax increases is staying where it was.

“If you’ve got a Republican Party that has just given up on the tax issue, it’s just a massive branding problem," Roskam said

Republicans typically object to higher tax rates for several reasons, saying they weaken incentives to work and harm investment decisions for business owners who pay their companies’ income taxes through their personal tax returns. But Trump cited a different reason.

Asked Wednesday by a reporter if he backed a millionaires’ tax, Trump said he feared wealthy Americans would move overseas to avoid higher taxes.

“It would be very disruptive, because a lot of the millionaires would leave the country," he said. “You’ll lose a lot of money if you do that."

While wealthy people sometimes move between states to lower their tax burdens, it is much harder to move abroad to avoid federal taxes. The U.S. taxes citizens on their worldwide income, no matter where they live. To escape taxation, wealthy Americans would need to renounce their citizenship and pay capital-gains taxes as if they sold their assets. Even if they did that and moved abroad, they would still pay U.S. taxes on U.S.-sourced income.

Republican lawmakers have been mixed on the idea of raising the top tax rate. Steve Bannon, the White House aide from Trump’s first term, has been pushing it, saying it could make the math work for GOP legislation. Business groups and tax-cut activists have been mobilizing opposition over the past few weeks.

“People have been surprised by the fact that this idea wasn’t shut down more quickly and more forcefully," said Neil Bradley, chief policy officer at the U.S. Chamber of Commerce.

Getting income-tax rates down was a signal achievement for Presidents Ronald Reagan and George W. Bush. Tax increases signed by President George H.W. Bush in 1990 broke his “read my lips" pledge and fractured the party, and the tax-cut wing has dominated since then.

On Tuesday, in the message posted by Gingrich, Trump said Democrats would use any tax increase against Republicans at the ballot box. Gingrich said a Trump assistant sent him the message and that he got permission to share it. The White House hasn’t commented.

“It’s a dead end," Gingrich said. “Interesting theory, terrible reality."

Gingrich, who led the intraparty fight against George H.W. Bush’s tax hikes, said Trump might be powerful enough among Republicans to muscle through a rate increase on the wealthy. “But what would the gain be?" he said. “Nobody on the left will give him any credit for it and it will split his own base. And I think he’s smart enough to understand."

Republicans aren’t opposed to all tax increases. Trump has spent the first months of his presidency sharply increasing tariffs, and those import levies fall hardest on consumers, according to economists.

The GOP tax law Trump signed in 2017 was a mix of tax cuts and tax increases, including limits on some deductions. Continuing that law beyond its scheduled expiration this year would actually raise taxes for about 9% of households. In addition, Republicans are considering some targeted tax increases—repealing clean-energy tax credits and raising taxes on university endowments.

Oren Cass, who heads American Compass, a group aiming to rethink conservative economic policy, said even the existence of the trial balloons is a positive sign.

“It’s very encouraging to see politicians now actually working through that logic instead of being paralyzed that there are things they’re not allowed to talk about or consider," he said.

Write to Richard Rubin at richard.rubin@wsj.com